Question

You are attempting to value a put option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk-free rate of interest is 10%. Calculate the value of a put option with exercise price $100.

Answer 1

Calculation of Salue of Put ceptian Exercise herice - $ 100 Risk free Rate of Return = 10%. Stock Carrent Price = $100 - (Spot Rate) Expected value of Stack at ma (after 1 year) Parolesleility (P) 50% of Increasing To $120 Probaleility (1-P) so% of Decreasing to $80 and

- Nowe expected value of Put with Exercise price $100 at Maturity ab. Stack Stock Price Exercise Value of (8 Crencise - Stock price, o $ 120 $100 $0 Coption Lapse) (100-120,0) $80 $100 / $20 (100-20, o) 100 - 20 Now t (1-P) Value of - put Upside Value x P of Put - 1 t Risk Douenside Value x of put free Rate 0 x 50% + $20 x 50% 1t 10 % = $ 9.og Value of Put ception is $ 9.09